The Commission of Financial Institutions for the Commonwealth of Puerto Rico (“OCFI”) ordered UBS Financial Services Inc. of Puerto Rico (“UBS”), a division of UBS Wealth Management Americas, to pay $5,200,000 in fines and restitution in an October 9, 2014 enforcement action. The penalty stems from UBS’ alleged recommendation to customers to use personal loans (“non-purpose loans”) for the purchase of municipal bond funds that ultimately trailed the sinking Puerto Rican economy. The original investment objective was to benefit from the tax advantages that these securities offer, but Puerto Rico’s economic woes have caused the devaluation of municipal bond funds generally. At the losing end of UBS’ practices were its conservative-risk clients who had significant portions of their liquid assets invested in closed-end funds, and whose non-purpose loans were ineligible for use in purchasing such securities.
As we have previously blogged, numerous lawsuits have been filed against UBS for the sale and marketing of these highly leveraged, risky closed-end bond funds that were heavily invested in Puerto Rican municipal debt. According to recently reported research, nineteen (19) closed-end local municipal bond funds sold by UBS brokers in Puerto Rico lost $1.66 billion in the first nine months of 2013, with the biggest losers being UBS Puerto Rico funds that had large holdings of municipal bonds that were originally brought to market with UBS as the underwriter. There were a total of 14 funds which faced severe losses last year, with the Puerto Rico Fixed Income Fund Inc. reporting losses of as much as 31% between August and September.
Pursuant to the OCFI order, UBS will pay $1,700,000 in restitution to 34 clients who are mostly elderly with a low net worth and conservative investment objectives, and who bought the bond funds between 2006 and 2013. UBS promises to further review its accounts to see whether additional restitution is rightfully due to investors. The remaining $3,500,000 in penalties will be placed in an investor education and investigation fund. Further, UBS’ Puerto Rico division must place six (6) of its advisers under enhanced supervision for alleged “objectionable” sales practices, including unauthorized client transactions. However, there have not been any terminations by UBS of its advisers relating to the improper sales practices.
OCFI has officially closed the case, and will not entertain any further claims on behalf of UBS customers. Their website states, “[w]e must clarify that UBS customers to be compensated under the Agreement were part of a sample selection by OCFI of customers that had a conservative investment profile, with low equity, senior citizen status, and a relatively high investment in closed-end funds relative to their total liquid assets. It is possible that some UBS customers with the referenced characteristics were not included by OCFI in the list of individuals to be compensated by UBS. It must be understood that OCFI worked with a sample and not the totality of customers as OCFI has limited resources and could not possibly analyze each and every single account.” UBS continues to face action from its clients via arbitration claims filed with the Financial Industry Regulatory Authority (“FINRA”).
Lax & Neville LLP is investigating claims on behalf of investors regarding possible sales practice abuses in connection with UBS Financial Services Inc.’s sale and marketing of various highly leveraged closed-end bond funds to customers in Puerto Rico. Lax & Neville has extensive experience in successfully prosecuting claims on behalf of customers and investors who have suffered losses, including experience in prosecuting claims involving leveraged funds. Additionally, Lax & Neville LLP has nationally represented small broker-dealers, investment advisers, financial services professionals and securities industry companies in regulatory matters and securities-related and commercial litigation. Please contact our team of attorneys for a consultation at (212) 696-1999.